As any reader of this blog knows, I have particular scorn for Paul Krugman, the New York Times columnist who used to be an economist. Today, peerless Paul examines the phenomenon of the "cult" of inflation. According to Krugman, there are many economists and politicians who continue to predict looming inflation even though that inflation never shows up. These people all want "tight money" according to Krugman. And just why is that? Krugman gives us the answer: these prognosticators of inflation are acting for ethnic and racial reasons.
Now let's stop right here. Krugman is actually telling us that Rick Santelli on CNBC and congressman Paul Ryan are worried about the inflationary impact of the enormous amount of cash pumped into the economy by the Federal Reserve because of racial and ethnic reasons. You really cannot make this stuff up. Indeed, if I wanted to create a phony column by Krugman to mock him, it would not have occurred to me to blame people's views on inflation on racism. Only the incredibly distorted mind of the real Krugman could come up with that howler.
So let's back off for a moment and regroup with a discussion about the causes of inflation.
1. The classic definition of inflation is that it is price increases caused when too much money is chasing too few goods. This is a simplistic definition, but it has a great amount of truth in it. People who have money are willing to spend more to get what they want; this is not rocket science, just reality.
2. The Federal Reserve has pumped two trillion dollars or more of extra cash into the US economy in the last few years. All that extra money would normally lead to massive inflation, but it has not. In Krugman's view, that means that the extra cash never will cause inflation and the Fed can keep on pumping more in forever.
3. So why is there little inflation? The principal reason is that one needs to look at who has that cash before one can see the inflation at work. At the same time that the Fed pumped the cash into the economy, other actions were taken by the government which kept most of the money out of the hands of the average American. New statutes and regulations made it much harder for banks to lend money to the middle class or to small business. Millions of illegal aliens were let into the country with the result that an oversupply of workers kept wages from rising for the least skilled among us. Laws like Obamacare and other new regulations and laws traumatized businesses to an extent that they were very wary about investing in new plant and equipment which would bring more jobs and production in the economy (and result in higher incomes). People who watched their retirement savings and home equity disappear in 2009 were also traumatized to a point that they held off making major purchases and decided to save more each month. As a result, most of the new cash ended up in three places: banks, the stock market and commodities. The banks that got the cash were holding it with essentially no cost. Interest rates are so low as to be non-existent. The banks put the cash in accounts with the Federal Reserve which also pay low interest but which provide a sufficient spread as to allow a guaranteed profit to the banks. The wealthy got some of the cash and they had no where to put it except into either stock or commodities. As a result, that is where prices went up. Stocks keep going up whether or not the economy does. (Remember too much money chasing too few goods.) Commodity prices are also generally higher than they were a few years ago for the same reason.
4. The real question, however, is what will happen if the public gets over its trauma and starts spending again. And what if the banks start lending again? Will we see a huge rush of inflation? (I say that at the risk of being called a racist by Krugman.) And if the inflation appears, how will it be controlled? The usual methods for controlling inflation are to squeeze the money supply, but that ship sailed long ago. Will we see interest rates of 10, 15 or 20% again like we did in the old Jimmy Carter economy? Will there be yet another recession as a result of these policies?
No one can be certain of the answers to these questions. That includes Paul Krugman. One thing, however, is certain. The answers are not the result of racism or ethnic identity (except in the distorted mind of Mr. Krugman.)
Now let's stop right here. Krugman is actually telling us that Rick Santelli on CNBC and congressman Paul Ryan are worried about the inflationary impact of the enormous amount of cash pumped into the economy by the Federal Reserve because of racial and ethnic reasons. You really cannot make this stuff up. Indeed, if I wanted to create a phony column by Krugman to mock him, it would not have occurred to me to blame people's views on inflation on racism. Only the incredibly distorted mind of the real Krugman could come up with that howler.
So let's back off for a moment and regroup with a discussion about the causes of inflation.
1. The classic definition of inflation is that it is price increases caused when too much money is chasing too few goods. This is a simplistic definition, but it has a great amount of truth in it. People who have money are willing to spend more to get what they want; this is not rocket science, just reality.
2. The Federal Reserve has pumped two trillion dollars or more of extra cash into the US economy in the last few years. All that extra money would normally lead to massive inflation, but it has not. In Krugman's view, that means that the extra cash never will cause inflation and the Fed can keep on pumping more in forever.
3. So why is there little inflation? The principal reason is that one needs to look at who has that cash before one can see the inflation at work. At the same time that the Fed pumped the cash into the economy, other actions were taken by the government which kept most of the money out of the hands of the average American. New statutes and regulations made it much harder for banks to lend money to the middle class or to small business. Millions of illegal aliens were let into the country with the result that an oversupply of workers kept wages from rising for the least skilled among us. Laws like Obamacare and other new regulations and laws traumatized businesses to an extent that they were very wary about investing in new plant and equipment which would bring more jobs and production in the economy (and result in higher incomes). People who watched their retirement savings and home equity disappear in 2009 were also traumatized to a point that they held off making major purchases and decided to save more each month. As a result, most of the new cash ended up in three places: banks, the stock market and commodities. The banks that got the cash were holding it with essentially no cost. Interest rates are so low as to be non-existent. The banks put the cash in accounts with the Federal Reserve which also pay low interest but which provide a sufficient spread as to allow a guaranteed profit to the banks. The wealthy got some of the cash and they had no where to put it except into either stock or commodities. As a result, that is where prices went up. Stocks keep going up whether or not the economy does. (Remember too much money chasing too few goods.) Commodity prices are also generally higher than they were a few years ago for the same reason.
4. The real question, however, is what will happen if the public gets over its trauma and starts spending again. And what if the banks start lending again? Will we see a huge rush of inflation? (I say that at the risk of being called a racist by Krugman.) And if the inflation appears, how will it be controlled? The usual methods for controlling inflation are to squeeze the money supply, but that ship sailed long ago. Will we see interest rates of 10, 15 or 20% again like we did in the old Jimmy Carter economy? Will there be yet another recession as a result of these policies?
No one can be certain of the answers to these questions. That includes Paul Krugman. One thing, however, is certain. The answers are not the result of racism or ethnic identity (except in the distorted mind of Mr. Krugman.)
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